Zillow claims that ‘operational capacity constraints’ has caused the hiccup in its home-buying business, but some analysts argue that bigger issues may be afoot. Why is Zillow abruptly pulling back from their ibuyer program after recently announcing a huge funding round? What does this mean for the future of real estate? Does Zillow know something we don’t?
What was in the announcement from Zillow on their “pause” in homebuying?
Zillow Group Inc. is taking a break from buying U.S. homes after the online real estate giant’s pivot into tech-powered house-flipping hit a snag.
Zillow, which acquired more than 3,800 homes in the second quarter, will stop pursuing new purchases for the remainder of the year as it works through a backlog of properties already in its pipeline.
“We’re operating within a labor- and supply-constrained economy inside a competitive real estate market, especially in the construction, renovation and closing spaces,” Jeremy Wacksman, Zillow’s chief operating officer, said in a statement. “We have not been exempt from these market and capacity issues and we now have an operational backlog for renovations and closings.”
What is the market saying?
Capacity constraints alone don’t explain everything, Stephens analyst John Campbell said. “We do think that there is likely more to the story so we’re surprised to see the positive reactions out of some of the other iBuyers,” he said in an email to MarketWatch.
One explanation is home prices. The past year has seen an explosion in home-price growth as home buyers seeking more space scrambled to compete for the little inventory in the market.
An August report from independent real-estate analyst Mike DelPrete found that Zillow, Offerpad and Opendoor were all paying well above the value of homes to purchase them in 2021, whereas back in 2019 they typically purchased properties at a discount.
What are four other reasons Zillow stopped buying houses?
I was a bit surprised by the news that Zillow was pausing homebuying. A few weeks earlier there were several announcements about big rounds of fundraising for their Ibuyer program in the form of new bond issuances.
- Prices high/peak of the market: In many cities throughout the country prices have peaked or are very close to a peak. There is no surprise that this has led to extreme appreciation and high prices.
- Overpaying for houses: Although the rest of the market is also paying “above market”, there was an interesting report showing ibuyers overpaying by around 7%. This is not sustainable over the long term
- Seeing “velocity” of the market shift: There is a slowdown occurring in the market with houses in most cities staying on the market longer. Time is money so as houses take longer to sell, margins are further crimped
- Wait for future opportunities: Zillow might also be seeing a “shift” in the market that will enable future opportunities at lower price points.
What are Zillow’s actions telling us about the real estate market?
Zillow has the not only the most but also best data on the housing market from search interest, sales, zestimates, etc… For Zillow to go on a limb and stop ibuying while its competitors like opendoor and others continue is a big market indicator. Regardless of the actual reason, Zillow with its actions is a warning to the real estate market.
Zillow’s stock has been hammered by its decision to halt Ibuying. For Zillow to take such a huge risk in the market is a strong indicator that Zillow knows something the rest of the market hasn’t figured out. Zillow’s actions highlight that the market is likely going to slow substantially, and that real estate is somewhere near a peak. Zillow’s halt to ibuying is a strong indicator of a market peak and possibly a correction. It would be wise to head Zillow’s actions as they are making a strong bet that changes in the market are underfoot.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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